Exhaustion of IP RightsExhaustion of IP Rights-- From the Viewpoint of Law From the Viewpoint of Law --

Feb. 18, 2008Katsuya Tamai

Professor, University of Tokyo

MS Symposium on Law and Economics of IP

at Hitotsubashi Univ.

2/26

TodayToday’’s Contents ContentIntroduction -Concept of “Exhaustion”

1. Modification of ProductsCase of Inc Cartridge/ CanonJ.S.C. Decision on Nov. 8, 2007

2. Vertical Trade Restriction3. International Exhaustion of IPRs

Conclusion

3/26

What is What is ““ExhaustionExhaustion”” of of IPRsIPRs ??

Transaction b/w A & B; B & Y…not regarded as infringementWhy？No stipulation to be applied in the statute

RetailerWhole Sale Consumer

X A B Y

Country P

4/26

TodayToday’’s Contents ContentIntroduction -Concept of “Exhaustion”

1. Modification of ProductsCase of Inc Cartridge/ CanonJ.S.C. Decision on Nov. 8, 2007

2. Vertical Trade Restriction3. International Exhaustion of IPRs

Conclusion

5/26

Modification of ProductsModification of Products

If B modifies the product, may B still transact it to Y?

If it is not always o.k., what is the borderline?

RetailerWhole Sale Consumer

X A B Y

Country P

6/26

The Case The Case Inc Cartridge/ CanonInc Cartridge/ CanonProduct in Question: ReplacementInk Cartridge of Inkjet PrinterPatent: Technology to Keep Ink inCartridgesCanon (Plaintiff) sell Cartridges Alleged Infringer (Defendant):

collect used cartridges;clean up ink inside;refill new ink;sell them at a lower price.partly manufacture in China

7/26

Precedents at Lower CourtsPrecedents at Lower CourtsTokyo Dist. Ct., Apr. 24, 2007 –Disposable cameraIP High Ct., Jan. 31, 2006 –Inc cartridge/ CANONTokyo Dist. Ct., Dec.8, 2004 –Inc cartridge/ CANONOsaka Dist. Ct., Nov. 26, 2002Tokyo Dist. Ct., Nov. 30, 2001Tokyo Dist. Ct. Nov. 29, 2001 -AcyclovirTokyo Dist. Ct., Aug. 31, 2000 –Disposable cameraTokyo Dist. Ct., Jun. 6, 2000 –Disposable camera;

preliminary injunction Osaka Dist. Ct., Feb. 3, 2000; O.High Ct., Dec. 1, 2000Tokyo Dist. Ct., Nov. 29, 1999Tokyo Dist. Ct., Sep. 22, 1999Osaka Dist. Ct., Apr. 24, 1998

8/26

Decisions at the CaseDecisions at the Case1. Tokyo District Court,

Dec. 8, 2004-in favor of the Defendant

2. IP High Court (Enlarged Body), Jan. 31, 2006-vacate and issued Injunction

3. Supreme Court, Nov. 8, 2007

9/26

J. S. C. Decision, Nov. 8, 2007 J. S. C. Decision, Nov. 8, 2007 11/3/3Exhaustion in General

“ The use of a patent is restricted under exhaustion doctrine only for the products licensed in Japan. When it is recognized that a product that is not identical to the [original] patented product is newly reconstructed by modification or replacement of any part of the product licensed in Japan, the patent holder may enforce the right.”(emphasis added)

10/26

J. S. C. Decision, Nov. 8, 2007 J. S. C. Decision, Nov. 8, 2007 22/3/3Test for Lack of “Identity” or Existence of “Reconstruction”

“[S]uch new reproduction of the patented product is to be recognized after the comprehensive study of the patented product’s attribute, content of the invention in question, details of modification/replacement and actual situation of the relating transaction [in the market], etc.”

11/26

J. S. C. Decision, Nov. 8, 2007 J. S. C. Decision, Nov. 8, 2007 33/3/3Elements to be considered:

1. Attribute of the Patented ProductThe product’s function, structure, material, intended use, durable period, mode of use

2. Content of patented invention3. Details of modification and replacement

the patented product’s actual status at the time of modification, etc., content and level of modification, usable life of the changed parts, technical function and economic value as a part of the patented product

4. Actual Situation of the Relating Transaction in the Market

5. “etc.”

12/26

Repair & ReconstructionRepair & ReconstructionRepair: permissibleReconstruction: forbidden“No element, not itself separately patented, that constitutes one of the elements of a combination patent is entitled to patent monopoly, however essential it may be to the patented combination and no matter how costly or difficult replacement may be.”Aro Manufacturing Co. v. Convertible Top Replacement Co., 365 U.S. 336, 345 (1961)

13/26

Similarity to German Case LawSimilarity to German Case Law11/2/2

Replacement of wearing parts “which are usually expected to have to be replaced during the life of the device”:assumed repair

However…Replacement of parts which „realizes (verkörpert)essential elements (wesentliche Elemente) of the inventive concept“: maybe reconstruction Fed. Sup. Ct. (BGH), 4. May 2004, BGHZ 159, 76 [90-92]= GRUR 2004, 758, 762 (II 3. b)β)

Repair (Reparatur): permissibleReconstruction (Neuherstellung): forbidden

14/26

Similarity to German Case LawSimilarity to German Case Law22/2/2Because “the technical or economic advantage of the invention is realized once again by the replacement,” it is “not to be able to say that the patent holder has already received the benefit (Nutzen) due to him by putting the device in the market”

Decision: in favor of the patent holderFollowed by:

High Ct. (OLG) Düsseldorf, 17. Nov. 2005, GRUR-RR 2006, 39,40-41-Coffee-Pad-SystemeBGH, 3. Mai 2006, GRUR 2006, 837, 838 (para.16) -Laufkranz (exhausted at the case)

15/26

TodayToday’’s Contents ContentIntroduction -Concept of “Exhaustion”

1. Modification of ProductsCase of Inc Cartridge/ CanonJ.S.C. Decision on Nov. 8, 2007

2. Vertical Trade Restriction3. International Exhaustion of IPRs

Conclusion

16/26

Business model making profit Business model making profit from wearing partsfrom wearing parts

RetailerWhole Sale

ConsumerPatentee

German: “essential elements”of the patented inventionU.S. “conditional” sale

Profit!

17/26

““ConditionalConditional”” Sale in U.S. the LawSale in U.S. the LawPatent exhaustion doctrine is triggered only by an unconditional sale: “The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods. This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the 'use' rights conferred by the patentee." Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992); B. Braun Medical v. Abbott Lab., 124 F.3d 1419, 1426 (Fed. Cir. 1997); LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1369-70 (Fed. Cir. 2006), cert. granted, 128 S.Ct. 28 (Sept. 25, 2007)

18/26

““ConditionalConditional”” Sale in the U.S. LawSale in the U.S. Law

Monsanto Co. v. Trantham, 156 F. Supp. 2d 855, 869-70 (W.D. Tenn. 2001); QSindustries, Inc. v. Mike's Train House, Inc., 230 F. Supp. 2d 1240, 1253 (D. Or. 2002); Pioneer Hi-Bred Int'l, Inc. v. Ottawa Plant Food, Inc., 283 F. Supp. 2d 1018, 1033-34 (N.D. Iowa 2003); Schofield v. United States Steel Corp., 2006 U.S. Dist. LEXIS 39605, **32-33 (N.D. Ind. Mar. 31, 2006); Mass. Inst. of Tech. v. Imclone Sys., 2006 U.S. Dist. LEXIS 52600, **7-9 (D. Mass. July 28, 2006); BASF Agrochemical Prods. v. Unkel, 2006 U.S. Dist. LEXIS 88672, *13 (W.D. La. Dec. 6, 2006) Minebea Co. v. Papst, 444 F. Supp. 2d 68, 157-60 (D.D.C. Aug. 17, 2006);

RetailerRetailerWhole SaleWhole Sale ConsumerConsumer

X A B Y

NoticeNoticeto B or Y?to B or Y? conditional!

19/26

Vertical Trade RestrictionVertical Trade Restriction--Aspects from the Competition LawAspects from the Competition Law

controlRetailerWhole Sale

Consumer

Recycling trader

Patentee

•State Oil Co. v. Khan, 522 U.S. 3, 11 (1997)•Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. __ (June 28, 2007)•Arco Prods. Co. v. Stewart & Young, Inc., 50 Fed. Appx. 336, 338 (9th Cir. 2002); Care Heating & Cooling, Inc. v. Am. Std., Inc., 427 F.3d 1008, 1013 (6th Cir. Nov. 2, 2005)

20/26

TodayToday’’s Contents ContentIntroduction -Concept of “Exhaustion”

1. Modification of ProductsCase of Inc Cartridge/ CanonJ.S.C. Decision on Nov. 8, 2007

2. Vertical Trade Restriction3. International Exhaustion of IPRs

Conclusion

21/26

ＸＸ’’

ＡＡ’’

ＢＢ’’

ＺＺ ＡＡ’’’’ ＢＢ’’’’ …………

“Parallel Route”

ＸＸ ＡＡ ＢＢ ＹＹ

Country L

IntInt’’l exhaustion of l exhaustion of IPRsIPRs andandParallel importation Parallel importation

Country PCountry Q

22/26

International Exhaustion: Comparative Law・Boesch v. Graff, 133 U.S. 697, 701-703 (1890)・Jazz Photo Corp. v. ITC, 264 F.3d 1094, 1105(Fed. Cir. 2001)・Fuji Photo Film Co.v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005).

“To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.”

BGH, 14. Dez. 1999, BGHZ 143, 268, 273-4 –Karate( ECJ, 16 July 1998, C-355/96 – Silhouette)

BG, 7. Dez. 1999, GRUR Int. 2000, 639, 646-47 -KodakSup. Ct., July 1, 1997, 51 Civ. L. Rep. 2299 -BBS

23/26

International Exhaustion:International Exhaustion:NOTNOT JustifiableJustifiableIPR holder may recover only once…on the reward theory (Belohnungstheorie)only justifiable in an unified market with free movement of goods Alternatives of a company X(i) to sell products at the lower price in Q(ii) not to sell any products in Qonly (iii) to sell products at different prices in P & Q ➡ maximize consumer surplus

24/26

Another View of IntAnother View of Int’’l Exhaustionl Exhaustion -- Trilateral RelationshipTrilateral Relationship

P

Q

R

XX

ZZXX’’

25/26

TodayToday’’s Contents ContentIntroduction -Concept of “Exhaustion”

1. Modification of ProductsCase of Inc Cartridge/ CanonJ.S.C. Decision on Nov. 8, 2007

2. Vertical Trade Restriction3. International Exhaustion of IPRs

Conclusion

Thank you!Thank you!

tamai@ip.rcast.u-tokyo.ac.jpwww.ip.rcast.u-tokyo.ac.jp